The Economics of

Global Agreements

Introduction

International Agreements in Principle

In principle, each country might contribute its true willingness to pay for a treaty

Result: an efficient level of global pollution control

But…

An international agreement is a public good: FREE-RIDING!Treaties will be too weak from a benefit-cost

point of viewOnce signed, nations have an incentive to

cheat

Solving the Environmental Free-Rider Problem

At the national level:Government mandates and enforces clean-up

regulations

At the international level: No government exists to force countries into

compliance

This leaves:Social Pressure, Trade Sanctions,

Compensation Funds

Monitoring and Enforcement

Each treaty sets up its own inter-governmental organization (IGO)Set non-binding standards that countries are

expected to meetMonitor compliance with agreements

Enforcement Tools

Compensation fundCarrot for both joining a treaty and complying

with its termsOnly effective with poor countries

Trade sanctionsThe most powerful tool availableUsually restricted to related products

Ozone and The Montreal Protocol

The ozone layer: screens out ultraviolet raysNot to be confused with ground-level ozone =

urban smog

Chlorofluorocarbons (CFCs) break down the ozone layerActive for up to a hundred years

The Ozone Hole

1977: US bans CFCs as aerosol propellants 1980: Treaty negotiations begin, major

opposition from CFC producers 1985: British study documented a huge,

seasonal ozone hole over Antarctica 1987: Countries sign the Montreal Protocol to

Protect Against Atmospheric Ozone Reduction

1988: Conclusive scientific link between ozone depletion and CFCs established

Montreal Protocol

10-year, 50% reduction in CFC production from a 1986 baseline

Developing countries given a 10-year grace period

Compensation fund of $60 million convinced India and China to join

Trade restrictions on CFCs 1992: Treaty nations agreed to eliminate

CFC production by 1996

Why the Montreal success story? How did countries overcome the free-

rider problem?Single pollutantSmall number of sourcesDramatic evidence of threatCompliance was much cheaper than

anticipatedCompensation fund brought poor countries

on board

Biodiversity

Preserving the stock of genetic material in natural ecosystems is important for itsExistence valueGene pool for medicine and agriculture

Historically: an open-access common property resource

Earth Summit

Rio Biodiversity Treaty, 1992Nations required to inventory and monitor their

biological assetsNations pursue sustained yield development and

conservation efforts, with aid $$ from rich countries

Products developed from the genetic resources of a country are the intellectual property of the host nation

Effectiveness of the Rio Biodiversity Treaty

US initially failed to signPoor countries have regulated access to

biodiversity No requirement that rich countries contribute

to the conservation fundNo enforcement mechanism establishedBottom line: Not much progress!

Strengthening the Rio Process?

Difficult to assess compliance with and progress toward such an agreement

Distant threat of biodiversity loss is unlikely to galvanize an aid effort from the developed world

Stopping Global Warming: Theory

Good news for a treatyGrowing concern over catastrophic impactsA clearly defined target: CO2 concentrations in the

atmosphere

Bad news for a treatyWidely decentralized nature of the problemFear of high costs for high emitters (US, China)Preventing deforestation will be difficult

Stabilizing CO2 Concentrations at 450 ppm

Bare Bones for a Successful Treaty Mandate numerical emission reduction

targets for CO2 and methane Provide a mechanism by which rich

countries can transfer technology and resources to poor countries

Provide strong enforcement mechanisms

Model Greenhouse Treaty

Cap & Trade System

Annual cap on targeted global emissions Rich countries trade expertise and

technology to poor countries in exchange for permits

Each country then reduces CO2 emissions to the level of permits held

Authorize comprehensive trade sanctions against failing countries

Stopping Global Warming: Reality

1992 Earth Summit: US pleaded uncertainty and weakened the framework global warming convention

Kyoto Protocol in December 1997

Kyoto Protocol Imposed emission targets and timetables on

industrialized countries Trading:

Clean Development MechanismJoint Implementation

Ratified by European countries, Canada, and Japan. Europe has met the 2010 goal; other countries have not.

US is the major industrialized country that has not ratified

Opposition to Kyoto: 1

Uncertainty as to the potential damage from climate changeMost economists agree: both neoclassical and

ecological economists now advocate mandatory emission caps. Disagreement on stringency: Kyoto or something weaker?

Opposition to Kyoto: 2 Poor countries should be forced into the

same timetables as rich countriesRich countries have the resources to develop

clean technologies, so that poor countries can comply at lower cost in the future.

Because CO2 lasts for 100 years, rich countries will remain primarily responsible for warming for the next few decades.

Opposition to Kyoto: 3 Kyoto would cost too much; would lead to

large-scale job lossAt this point, Kyoto would cost a lot! But if we

had started in 2005, estimates suggest costs of between $0 and $400 per household per year.○ For comparison, war in Iraq has cost well over that.

Previous estimates of job loss from environmental regulation have never been borne out.

The Last Word…

Set your environmental goal:○ Efficiency, Safety, Sustainability

1. Recognize the constraints on effective government action

2. Look for ways to do better○ Incentive-based regulation○ Clean technology promotion

3. Now, get to work!